RESPA: What Is It And How Does It Work?
4-Minute ReadNovember 24, 2020
When it comes to purchasing a home, there’s a lot of moving parts, expenses and other complexities that the average person may not fully understand, so people often rely on experts in the industry to guide them through the process. Before more regulations were put in place, some of those experts used this knowledge gap to take advantage of novice home buyers and sellers, charging additional fees that made it more expensive to purchase a home.
Luckily, the Real Estate Settlement Procedures Act (RESPA) was passed to protect consumers and help prevent these types of abusive practices.
What Is RESPA?
RESPA requires settlement cost disclosures for buyers and sellers and eliminates abusive practices in the real estate settlement process. The act protects against kickbacks and limits the use of escrow accounts.
History Of RESPA
RESPA was passed by Congress in 1974 in an effort to reduce settlement costs by preventing illegal or unearned fees from being included in the costs to purchase a home.
Originally regulated by the U.S. Department of Housing and Urban Development (HUD), RESPA is now regulated by the Consumer Financial Protection Bureau (CFPB), a government agency responsible for protecting and educating consumers about financial services and products.
The point of RESPA is to help ensure home buyers understand the costs and terms associated with purchasing a home and can make informed decisions on their real estate transactions. It also helps protect home buyers from added fees.
There have been several changes made to RESPA, but all additions were designed to better protect home buyers and sellers.
For example, the 2008 RESPA Reform Rule required a standardized Good Faith Estimate (GFE), an estimate provided by the lender that lists the costs and terms of the mortgage loan. This can help borrowers compare costs and loan terms between different lenders.
How Is RESPA Used In Real Estate?
RESPA is used to protect home buyers and sellers in real estate transactions by requiring the disclosure of all settlement costs, which helps prevent “hidden fees” from things like kickbacks, referrals and escrows, which may make it more expensive to close your loan.
Often referred to as a form of bribery, kickbacks are illegal payments or other incentives used as compensation for performing undisclosed services, such as recommending certain businesses or products or showing preferential treatment.
Per Section 8 of RESPA, individuals and businesses are prohibited from accepting or providing any kind of kickbacks, unearned fees and fee-splitting.
Regulates Escrow Accounts
Section 10 of RESPA regulates the use of escrow accounts, primarily by prohibiting loan servicers from requiring excessively large escrow accounts. The law limits escrow accounts to the funds necessary to pay for such charges as property taxes and homeowners insurance. To determine this amount, the servicer will add the prior annual property tax and your insurance premium amount, then divide it by 12 to get the monthly escrow payment amount. This amount is part of your monthly mortgage payment. You should receive an escrow account statement that breaks down your payment to show how much you’re paying in escrow. Keep in mind, your escrow account is analyzed each year and may increase or decrease throughout the years as property taxes fluctuate annually.
Bans Title Insurance Mandates
RESPA prevents home sellers or their attorneys from directly or indirectly mandating that mortgage loan borrowers purchase title insurance from specific companies as a condition of selling the property. This provision is outlined in Section 9 of the law.
How Are RESPA Violations Enforced?
Violating RESPA can come with severe penalties, including lawsuits, fines and imprisonment.
For example, the liabilities for violating Section 8 kickbacks rules can include a fine of up to $10,000 and/or up to one year in prison. For violating Section 9 bans on title mandates, the seller could be found liable to pay up to three times the cost of the insurance paid by the borrower. And when it comes to escrow account violations, HUD may impose a civil penalty on the servicer.
Those who feel like their service provider violated RESPA should file a complaint with HUD or their servicer (depending on the violation). Keep in mind that some of these incidents have timelines. For example, those with kickback violation complaints may have one year to file suit.
Servicing complaints must be given to the loan servicer in writing and the servicer must provide written acknowledgment of the complaint within 20 business days of receiving it. The servicer then has 60 business days to correct the issue or validate the state of the account.
The purpose of RESPA is to protect real estate buyers and sellers from unnecessary payments. This is done in part through fee disclosures that not only help you spot red flags and budget correctly but also help you compare costs to find the best lender.
If you suspect that you’ve been a victim of a RESPA violation or are currently experiencing one, we recommend contacting a real estate attorney. They’ll be able to answer questions, offer advice, provide the right contacts and help walk you through the legal process.